Wall Street Has War on the Brain

www.washingtonpost.com Last Week Sunday, January 26, 2003; Page H02

It may be a month or two before the first shots are fired in Iraq, but for all intents and purposes the war has already begun on financial markets.

On Wall Street, stock price declines over the past two weeks have wiped out the gains built up earlier in the month on expectation of an economic rebound later in the year. On Friday, stocks took their steepest dive in four months, leaving the Dow Jones industrial average off more than 5 percent for the week. A steady stream of downbeat corporate earnings reports and forecasts prompted the sell-off, but most analysts blamed jitters about war for the market's downbeat mood.

Perhaps more ominous was the nine-day tumble of the dollar against the euro, with the dollar ending the week at a three-year low of $1.08 to the euro. That's down 1.4 percent for the week and 8 percent over the past two months. Shaken by what they see as President Bush's willingness to have the United States bear the full political and economic cost of a war to oust Saddam Hussein, some European investors have concluded that the dollar and dollar-denominated stocks and bonds may not be the safe havens in a time of geopolitical crisis that they are usually thought to be. Not surprisingly, the price of gold continued to climb, hitting $368 an ounce by week's end.

The challenge for the dollar is not that foreigners are selling their U.S. stocks and bonds en masse. It's that at a time when the United States has to attract more than $1 billion a day in foreign capital to sustain its record trade deficits, the dollar can fall even if Europeans and Asians simply slow the pace of their new U.S. investments.

The dollar's fall mirrors the steady increase in price of crude oil. The continued shut-off of supply from strike-ridden Venezuela and fears that another Gulf War could disrupt shipments from Iraq and other Middle Eastern countries combined to drive up the price in New York trading Friday by 3 percent, to $33.28 per barrel -- 69 percent higher than at this time a year ago. Economists say that when gross domestic product figures come out this week, higher energy prices will be one reason the numbers may show the economy has stopped growing.

Indeed, in a meeting last Monday with more than a dozen economists, President Bush acknowledged that because of the downdraft in consumer and business confidence caused by anxiety over war, the package of tax cuts he has proposed will have "little impact" on the economy or the stock market in the short term. He and his team are now pitching the plan as a stimulant to long-term growth.